Apple Vs. Meta: Which VR Stock Is Better?

Summary:

• Apple and Meta Platforms are the two main players in the virtual reality (VR) space, with Apple launching its Vision Pro headset and Meta offering the Quest series.
• Both companies target different market segments and customer bases, with Apple focusing on the high-end market and Meta aiming for affordability, allowing room for both to profit in the VR industry.
• Taking into account the VR offerings, competitive landscape, and valuations, I consider Apple a better buy than Meta, although Meta has a stronger first-mover advantage in the VR market.

Apple (NASDAQ:AAPL) and Meta Platforms (NASDAQ:META) are two companies making big moves in virtual reality (“VR”). Meta has been in the space for years now, through the Oculus and later Meta Quest. Apple entered this week, with the launch of the Vision Pro.

Today, AAPL and META are the two obvious plays for those looking to invest in VR and AR. Alphabet (GOOG) made some moves in AR years ago, but its AR product, Google Glass, was discontinued. That leaves Apple and Meta as the two main players in the space.

The VR concept has struggled to catch on. In the first quarter, Meta’s VR segment, Reality Labs, saw its revenue decline 51% as fewer people bought the Quest 2. The recent launch of Quest 3 will likely cause revenue to rise again in Q2, though we don’t know how much. Meta’s VR segment has never done more than a few hundred million in quarterly revenue. As a result, there is a perception that VR is a ‘fad’ product category.

Apple’s Vision Pro launch has the potential to change all of that. The WWDC at which the device was launched had over a million live viewers. The subsequent video ad has reached 27 million views. Apple got a lot of people talking about VR this week, and that could help drive sales.

There have even been some signs that Apple’s launch could help Meta. Apple priced the Vision Pro at $3,499, a price point that many customers said they found unattainable. Meta’s offerings start at $500–less if you’re willing to buy older models–and max out at $1,000. The most expensive Quest model is less than a third the price of the Vision Pro, so it’s possible that Apple’s highly-publicized launch could get price-sensitive customers buying Quests. In fact, there is some indication that that’s already happening. People on the Quest subreddit have been saying that the Vision Pro has them interested in buying Quests as lower-priced alternatives. So Apple’s launch could have real marketing benefits for Meta.

We have two companies here that could easily benefit from increased adoption of VR and AR in the years ahead. The question is, which, between the two of them, is the better buy? It’s an important question to think about because both Meta and Apple shares are fairly richly valued right now, and both companies are spending a lot of money on VR. Sure, you could diversify into both, but if you must pick just one, you should pick the one whose vast VR spending will actually pay off. In this article I will explore Apple and Meta stock side by side to see which stock is a better VR buy.

There is Room for Both Companies

Before getting into comparisons between Apple and Meta, I should say that I think there is plenty of room for both Apple and Meta to make money in VR. They are the two best known names in the space and there is significant potential for them to help each other.

You might recall from economics 101 that competition is bad for margins, and that duopoly firms are less profitable than monopolies. These observations are correct in general, but there are situations in which competition helps both firms.

The first is when the two firms are targeting completely different market segments. When two companies’ pricing strategies are so different that they’re targeting totally different customer bases, then the similarity of their products doesn’t matter: they’re targeting different markets. For example, LVMH (OTCPK:LVMHF) is not in competition with Shein. Both companies sell clothes, but LVMH sells luxury clothes and Shein sells budget clothes. The same people are not in the market for both companies’ offerings.

A similar thing is happening with Meta and Apple. Meta’s offerings are so much cheaper than Apple’s that, basically, these companies are not going after the same customers. Meta appears to be trying to maximize volume by selling to everyone who wants a VR headset, Apple seems to be going for margins by selling to wealthy people. There is room in the market for both companies, particularly when they have completely different customer bases in mind.

A second thing that investors will want to note is publicity. When two companies are promoted by the media as being in a “war,” both of them get immense amounts of free publicity which pushes the third, fourth and fifth place companies aside. During the Cola Wars, Richard Branson launched Virgin Cola, putting all his star power behind the brand. It still failed. Because of the “Cola Wars” narrative, Coca-Cola (KO) and Pepsi (PEP) received immense amounts of free publicity that made it impossible for smaller names to compete. Even pretty well-branded ones like Virgin failed. Today, the only companies competing with Coke and Pepsi are grocery stores that sell dirt-cheap store brands. We could see a similar thing happening in VR where Meta and Apple get free publicity for their “David and Goliath” competition, making it impossible for smaller companies to get any attention.

The Products

Key to understanding whether Apple or Meta will dominate VR is the nature of their products. They are similar in some ways, but different in others, so they are worth comparing.

Apple’s Vision Pro has:

• A 3D camera.

• Two 23 million pixel displays.

• Spatial audio.

• An M2 chip for general computing.

• A new R1 chip for processing the data from 12 cameras.

• An external battery.

• 2 hours of battery life.

• No controllers.

Meta’s Quest Pro has:

• 1920 by 1080 resolution.

• Spatial audio.

• A snapdragon chip.

• 2 hours of battery life.

• Controllers.

Basically, Apple is going after the extreme high end of the market, with a display that’s four times sharper than 4k and advanced chips. Meta, in its most high end headset, is aiming for a more affordable experience.

The expected outcome of these different product strategies is that Meta will ship more headsets while Apple will achieve positive margins on the product faster. In the first quarter, Meta Platforms lost $3.9 billion on Reality Labs. Apple, with its higher-priced product, will likely be able to turn profits relatively quickly. It’s true that Vision Pro’s components are expensive, but Apple generally prices its products to be able to capture healthy margins on them–I wouldn’t expect this product to be different. There are some potential issues Apple could encounter, like simply not selling enough headsets. Reportedly, the projected sales volume for the Vision Pro was slashed from 1 million to 150,000, due to consumers rejecting Apple’s high price point. If sales are too low then Apple might not recoup its R&D costs quickly. However, Apple only has to clear $1,000 in manufacturing costs to profit on the Vision Pro, so if it has to cut costs to sell the headset, it may still make money off it.

Valuations

Having looked at Meta and Apple’s VR offerings side by side, it’s time to look at the companies’ valuations. Both Meta and Apple are expensive compared to the S&P 500, although Apple is a little more expensive going by multiples.

At today’s prices Apple trades at:

• 30.7 times earnings.

• 7.5 times sales.

• 45.68 times book value.

• 25.92 times operating cash flow.

• 29.6 times free cash flow.

Meta, on the other hand, trades at:

• 32.8 times earnings.

• 5.98 times sales.

• 5.44 times book value.

• 13.45 times operating cash flow.

• 39 times free cash flow.

As you can see, most of Apple’s multiples, particularly the book value multiple, are higher than Meta’s. However, Apple scores a win on the all-important free cash flow multiple. Free cash flow is how much money could theoretically be taken out of a business and given to investors, and Apple is cheaper relative to that than Meta is. If you discount Apple’s trailing 12 month FCF at the 10 year treasury yield (3.74%), with a 0% growth assumption, you get a $163 price target. If you do the same discounting exercise on Meta, you get a $177 price target. This calculation gives Apple 9.75% downside and Meta 33% downside. Of course, this DCF calculation assumes 0% growth. If Apple or Meta can achieve positive growth in the quarters ahead, then they are worth more than my simple DCF calculations state. Last quarter, Apple’s earnings grew at 0% while Meta’s declined. If we assume that these trends continue, then Apple’s free cash flow is less overvalued than Meta’s is.

Competitive Landscape

In order to gauge whether Apple and Meta can get their growth back, we need to know about their competitive positions. This can tell us whether they are strong enough to resume growing when the current tech downturn is over.

Apple’s competitive position is very strong. As I wrote in past articles, it has one of the world’s strongest brands. It also has an interconnected ecosystem that incentivizes buying multiple products instead of just one. All of your files sync seamlessly across all of your Apple devices. This helps to ensure repeat purchases.

Meta’s competitive position isn’t quite as strong as Apple’s, though it is strong. The company took a $10 billion hit to revenue when Apple changed its privacy policy. This happened in 2021 and Meta’s revenue growth is still much slower than it was before Apple’s privacy changes. That argues for significant competitive vulnerability. On the other hand, Meta’s daily active users keep growing quarter after quarter, and Instagram Reels are starting to gain on TikTok. On the whole, Meta has a good competitive position.

The Final Verdict

Considering everything–the VR offerings, the competitive landscape, and the valuation–I consider Apple a better buy than Meta today. This is reflected in my actual trading of both stocks: I sold my META at $240, I keep holding my AAPL today. As you may have noticed, I rated both of these stocks ‘hold.’ The reason for that is I think they’re both a little too pricey to invest fresh cash into today. Apple isn’t a terrible buy here in my opinion, but the valuation is pushing it. I find META to be an even tougher sell at these levels.

There is one caveat to what I wrote above:

If you were betting on Meta and Apple purely as VR plays, and could somehow buy the VR segments separately from the rest of the company, I’d consider Meta the better buy. Meta has a proven history with VR, has shipped tens of millions of headsets, and has an established library of games. Apple is reportedly having to slash sales forecasts due to Vision Pro’s high price point, and doesn’t have very many third party apps for its headset–at least not compared to Meta’s 1,440. These facts point to Meta selling more headsets than Apple for the foreseeable future. Meta’s first mover advantage in VR is significant, although Apple is the overall better company.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, GOOG, GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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